Magazine

Telecom Titans Team Up

July 02, 2006

Siemens (SI) CEO Klaus Kleinfeld once famously dunked a Nokia (NOK) mobile phone in a glass of water in a show of contempt for his Finnish rival. Guess he won't be doing that anymore. On June 19, Siemens plugged almost all of its telecom equipment business into a joint venture with Nokia, creating a giant whose $20 billion in annual sales will allow it to compete with soon-to-merge Alcatel (ALA) and Lucent, (LU) as well as Sweden's Ericsson (ERICY).

The new entity, dubbed Nokia Siemens Networks, will have its home phone in Helsinki, and Nokia executives will dominate, a tacit acknowledgement that the Finns have proved to be more adept at dealing with the fast-moving telecom market. German commentators screamed that Kleinfeld is turning his back on Siemens' roots in communications, which date to the telegraph age. But Kleinfeld is obviously more concerned with reversing a recent history of lackluster profits. The duo plans to squeeze out $1.5 billion in costs, thus boosting their prospects in the critical Asian markets. The move is also likely to speed the pace of hookups in the industry.

See "Siemens, Nokia Point the Way"

Apparently ruling the software roost isn't that much fun anymore. Bill Gates announced on June 15 that he will ease away from his labors at Microsoft (MSFT) over the next two years and focus on his foundation.

See "Bill Gates's Long Goodbye"

Will a top gun go down in flames? Production snafus on Airbus' new A380 megaplane have triggered a crisis at parent EADS. No?l Forgeard, the EADS co-CEO who ran Airbus until last year, is under pressure to resign as regulators probe his large sale of EADS shares in March. That was just before EADS says it learned of the A380 delays, which sent shares into a 26% tailspin when the news came out this month. The stock fell again on June 21 on fears about political meddling, after French Prime Minister Dominique de Villepin suggested reexamining EADS's shareholding structure, now carefully balanced between French and German interests.

Everyone's nervously eyeing the housing sector, and it seems to be showing signs of life. The U.S. Census Bureau reported on June 20 that construction starts rose 5% in May. Then the Mortgage Bankers Assn. said on June 21 that applications for loans ticked up 0.1% in the week ended June 16. Alas, a couple of numbers do not a rebound make. Economists figure the market has further to fall, pointing to higher interest rates and a growing inventory of unsold homes.

See "Beware False Housing Hopes"

How do you say "Two Big Macs, and fill 'er up" in Mandarin? On June 20, McDonald's (MCD) and Sinopec unveiled plans to develop drive-through restaurants at an undisclosed number of the energy company's 30,000 gas stations on the mainland. Soaring Chinese car ownership makes the drive-through format a no-brainer for Mickey D's, which opened its first eatery in Shenzhen back in 1990 and has roughly 750 in China now. The fast-food king plans to add 250 outlets by the 2008 Beijing Olympics, and executives think the country could eventually support 10,000.

Deutsche B?rse may have scored a goal into its own net and thus lost its match with the NYSE (NYX) to take over the Euronext exchange. In a rejiggered bid to assuage French fears that Euronext would be crushed in a Teutonic embrace, Frankfurt offered to share power with Paris and use a French system to trade equities. Pols in its home state of Hesse quickly waved a yellow card for foul play. Premier Roland Koch, worried about Frankfurt's future as a financial center, called it "a step too far." Economy Minister Alois Rhiel threatened a veto.

Poor Vonage. Shares of the Internet phone upstart have cratered by 48% since its May 24 IPO. Now investors have something new to sweat about: On June 20, Verizon (VZ) said it has sued Vonage over alleged patent violations. The telecom giant sportingly noted that it hasn't asked the courts to shut down its tiny rival, but it may not have to bother. Analysts at Pyramid Research questioned on June 20 whether Vonage, which is expected to lose $330 million this year, is "toast." A Vonage spokesperson dismissed the complaint: "Instead of competing against us in the marketplace, they sue us."

The Supreme Court muddied the Clean Water Act on June 19 in a case that inspired three opinions, none of which mustered a majority. Justice Anthony Kennedy delivered the deciding vote, directing a court in Michigan to take a second look at its broad definition of a protected wetlands area. Kennedy wrote that only wetlands with a "significant nexus" to a waterway deserve federal protection but left it up to regulators to figure out what that means. The splintered opinion dismayed greens while offering scant solace to developers, who predicted it will give local projects little relief from oversight.

Swiss food giant Nestl? expanded its waistline by announcing on June 19 that it would buy weight-loss outfit Jenny Craig for $600 million from private equity firms ACI Capital and MidOcean Partners. Craig, with some 600 weight-loss centers across the U.S., boosted sales from $300 million four years ago to $430 million last year. Nestl?, best known for chocolate, already owns the Lean Cuisine line. Weight loss is an ever-richer business as the U.S. obesity epidemic worsens.

Welcome to the mean streets of Hollywood. After Variety reported on June 19 that Steve Jobs was talking with studios about downloading movies over Apple's (AAPL) iTunes, Tinseltown brass held firm that they won't make the same mistake as the music industry and let him grab their flicks cheaply. Studios want to charge $19.99 for a new film, say insiders, whereas Jobs proposed $9.99, arguing that Hollywood needs to offer a killer deal to keep Net users off piracy sites. The higher price would soothe DVD retailers such as Wal-Mart (WMT), which charge around $20. It's called hardball, Steve. Maybe they'll do lunch.

See "Apple's iTunes Movie Muddle"

If government were baseball, Deputy Secretary of State Robert Zoellick would be the player to be named later. On May 30, President George W. Bush tapped Goldman Sachs (GS) CEO Henry Paulson to be his next Treasury Secretary. On June 19, Zoellick, who wanted the top Treasury job himself, announced he was quitting the Administration -- to join investment banking powerhouse Goldman as vice-chairman. It may not have been a trade, but Bush got a Wall Street heavyweight for Treasury, and Goldman got a well-connected expert in international finance to run its overseas banking operations.

Zoellick, 52, has a long Washington r?sum?, including stints at Treasury and State under the first President Bush and as U.S. Trade Representative from 2001 to 2005. No word on how much Goldman will pay Zoellick, but he'll be making plenty more than Paulson, who is taking a $38 million cut to come to Washington.